Trends and Proposals for Corporate Tax Revenue

Trends and Proposals for Corporate Tax Revenue

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Updated May 8, 2024
Trends and Proposals for Corporate Tax Revenue
U.S. corporate tax revenues have declined, relative to the
some cases by altering the international tax structure. The
size of the economy, since the mid-1960s. Corporate tax
House-passed Build Back Better Act (BBBA; H.R. 5376)
revenue as a percentage of gross domestic product (GDP)
would have raised around $800 billion in corporate taxes in
fell from 3.9% in 1966 to approximately 1.6% in 2023. This
FY2022-FY2031, but that legislation did not advance. The
decline in corporate tax revenue is due to several factors.
bill, renamed the Inflation Reduction Act (P.L. 117-169), as
Average tax rates have declined, primarily due to
enacted, imposed a minimum tax of 15% on book income
reductions in the statutory rate and changes in depreciation.
of large corporations and a 1% tax on stock buybacks.
The corporate tax base has also been reduced through
declining profitability (return on assets), increased use of
Raising the Corporate Tax Rate and Revising the
the pass-through organizational form for businesses, and
Minimum Tax and Stock Buyback Tax
international profit shifting.
The corporate tax rate is currently 21%, levied as a flat rate,
reduced from a top marginal rate of 35% before 2018 by the
Whereas U.S. corporate tax revenue has decreased,
2017 tax law commonly known as the “Tax Cuts and Jobs
corporate tax revenue in other Organisation for Economic
Act” (TCJA; P.L. 115-97). President Biden has proposed an
Co-operation and Development (OECD) member countries
increase to 28% with a revenue gain of $1.3 trillion for
has, on average, increased. Average corporate tax revenue
FY2025-FY2034. S. 4098 (Sanders) and H.R. 7933
collected by OECD countries has increased from 2.1% of
(Schakowsky) propose a graduated corporate rate with most
GDP in 1965 to 3.3% of GDP in 2021 (see Figure 1).
corporate income taxed at 35%. President Biden has also
Figure 1. Corporate Tax Revenue, as a Percentage of
proposed to raise the minimum tax rate on book income to
GDP, 1965-2021
21% and to increase the stock buyback tax rate to 4%. S.
413 (Brown) and S. 5953 (Sykes) would raise the stock
buyback tax rate to 4%. S. 1559 (Barrasso) and H.R. 3210
(Arrington) would repeal the minimum tax and H.R. 515
(Kustoff) would repeal the stock buyback tax.
Increasing the Minimum Tax on Foreign Source
Income (GILTI)
President Biden’s budget proposals and several bills in the
118th Congress would increase the minimum tax on foreign
source income, known as the tax on Global Intangible Low
Taxed Income or GILTI, enacted by TCJA 2017. (See CRS
Report R45186, Issues in International Corporate
Taxation: The 2017 Revision (P.L. 115-97), by Jane G.
Gravelle and Donald J. Marples for a discussion of
Source: OECD Tax on Corporate Profits, https://data.oecd.org/tax/
international tax rules.) Under current law, GILTI targets
tax-on-corporate-profits.htm, downloaded April 23, 2024.
intangible income by allowing a deemed deduction equal to
Note: Tax on corporate profits includes taxes levied by all levels of
10% of tangible assets. Any remaining income is allowed a
government.
deduction of 50% (37.5% after 2025) and then taxed at
21%, leading to a tax rate of 10.5% (13.125% after 2025).
Figure 1 tracks the differing trends in U.S. and OECD
Foreign oil extraction income is excluded and not subject to
corporate tax revenue over time. The United States
any U.S. tax.
collected 1.8 times as much corporate tax revenue as the
OECD average in 1965 (as measured in shares of GDP).
Current law allows credits for foreign taxes paid; the credits
Since 1981, however, U.S. corporate tax revenue as a
are limited to U.S. taxes due on foreign-source income, but
percentage of GDP has been less than the OECD average
are imposed on an overall basis across countries. This
(which includes the United States). In 2021, OECD average
treatment allows for the use of credited taxes paid in high-
corporate tax revenue as a percentage of GDP was about
tax countries to offset U.S. income tax due in low-tax
twice as large as the U.S. corporate tax revenue as a
countries. For GILTI, the credit is limited to 80% of foreign
percentage of GDP.
taxes paid.
Corporate Tax Proposals
The Biden Administration’s budget would increase the tax
President Biden’s budget proposes an increase in the
rate to 21%, and four bills in the 118th Congress—S. 357
amount of revenue raised by the corporate tax system by
(Whitehouse), S. 4098 (Sanders), H.R. 884 (Doggett), and
about $2.6 trillion over the next 10 years. Several
H.R. 7938—would tax income at full rates. All of the
legislative proposals would increase corporate taxes, in
proposals would eliminate the deemed deduction for
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Trends and Proposals for Corporate Tax Revenue
tangible assets and apply the foreign tax credit on a per
that has a treaty with the United States). See CRS Report
country basis. These proposals appear to be motivated, in
R40468, Tax Treaty Legislation in the 111th Congress:
part, by concerns that the exemption for tangible income
Explanation and Economic Analysis, by Donald J. Marples
might encourage the movement of investment abroad. The
for an explanation of the treaty-shopping issue.
budget proposal would include foreign oil extraction
income in GILTI.
Dual-Capacity Shareholder
The budget proposal, S. 4098, and H.R. 7938 would restrict
Repeal of Deduction for Foreign-Derived
foreign tax credits for taxes paid where an income tax is
Intangible Income
paid in part to receive a benefit (i.e., the firm is paying a tax
In 2017, the TCJA created the foreign-derived intangible
in a dual capacity) to the amount that would be paid if the
income (FDII) deduction, aimed at equalizing the treatment
taxpayer were not a dual-capacity taxpayer. This provision
of intangibles located abroad and in the United States. FDII
typically relates to taxes being substituted for royalties in
is based on a firm’s share of exports and a deemed
oil-producing countries.
deduction for 10% of tangible income, with the remaining
income allowed a deduction of 37.5% (21.875% after
Other International Provisions
2025), leading to a tax rate of 13.125% (16.4% after 2025).
The budget proposal would limit the deduction for foreign
dividends for U.S. shareholders with a 10% ownership to
S. 4098, H.R. 7938, and the budget proposal would
dividends from controlled foreign corporations (CFCs). S.
eliminate FDII.
4098 and H.R. 7938 would eliminate check-the-box and
Limit Interest Expense Deduction for
look-through rules for CFCs, methods of avoiding U.S. tax
Multinationals
on foreign source income.
All four bills and the budget proposal would allocate
Corporate Reorganizations
interest deductions among countries based on their share of
The budget proposal contains proposals imposing taxes in
income. This provision is aimed at preventing firms from
certain types of corporate reorganizations. S. 4011
allocating interest deductions to the United States and out
(Whitehouse) would disallow tax-free benefits for large
of low-taxed countries.
acquisitive reorganizations.
Modifying the Base Erosion and Anti-Abuse Tax
Temporary Reinstatement of Expensing and
The base erosion and anti-abuse tax (BEAT), enacted in
EBITDA Base for Interest Limitation
2017, requires corporations to add certain payments
The TCJA allowed 100% expensing (allowing the
between related foreign firms and then taxes them at a 10%
acquisition cost to be deducted immediately rather than
rate (12.5% after 2025) if higher than the regular tax. BEAT
over a period of years) for equipment and software, but
does not allow tax credits except for some temporary
began phasing the provision out over five years, beginning
domestic credits (no foreign tax credits). S. 4098 and H.R.
in 2023. The act also substituted a five-year write-off period
7938 would accelerate the tax rate increase and eliminate
for 100% expensing for research and experimentation
the temporary domestic credits. The budget proposal would
beginning in 2022. It also limited interest expensing to 30%
replace BEAT with an undertaxed profits rule (UTPR) that
of earnings before interest, taxes, depreciation, and
would impose a top-up tax on firms to the extent that
amortization (EBITDA) but introduced a more restrictive
related subsidiaries do not pay a minimum tax on financial
measure based on earnings before interest and taxes (EBIT)
income, consistent with the OECD/G20 Pillar 2 rules.
in 2022.
Anti-Inversion and Treaty-Shopping Rules
H.R. 7074 (Jason Smith), which has passed the House,
Under current law, firms that invert (move their
would reinstate full expensing and EBITDA for 2022
headquarters abroad) by merging with foreign firms are
through 2025. These provisions apply to noncorporate
treated as U.S. firms for tax purposes if the U.S.
businesses as well, but will affect corporate revenues.
shareholders own more than 80% of the shares. There are
also penalties if shareholders own more than 60% of the
shares. The budget proposal and all four bills would treat
Donald J. Marples, Specialist in Public Finance
these new firms as U.S. firms if the U.S. shareholders have
Jane G. Gravelle, Senior Specialist in Economic Policy
more than 50% ownership or if they are managed in the
IF11809
United States. S. 4098 and H.R. 7938 would also tighten the
rules affecting treaty shopping (going through a country

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Trends and Proposals for Corporate Tax Revenue

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https://crsreports.congress.gov | IF11809 · VERSION 10 · UPDATED